Finance Redefined: Is DeFi really a threat to centralized finance? Oct. 14-21


No major euphoria-worthy moments happened this week — the ecosystem is still cooling off. 

I think the biggest sign of that is Uniswap’s trading volume. After hitting a peak of slightly less than $1 billion in daily volume in early September, those numbers steadily deflated.

Courtesy of Uniswap’s sleek dashboard.

But despite the downtrend, I think even the current level is still well beyond the wildest imagination of a DeFi fan in 2019. For reference, those figures are roughly on par with Bitstamp or Bitfinex (even though as I write this, their volume seems to have skyrocketed with the PayPal news).

This analysis of a survey on centralized exchange operators captured my attention though. What they say is that they don’t fear DeFi, but the article’s author posits that their actions betray their true beliefs. Given the plethora of “CeDeFi” platforms, we can definitely see a degree of co-opting done by powerful exchanges.

So should CeFi representatives be afraid of DeFi?

Well, I think they should be concerned but not afraid. DeFi as it exists now in many ways repeats what these exchanges already do. Uniswap is obvious, but then you have stuff like Compound and Aave that are mostly used, as I and many others believe, for leveraged trading.

That’s just everything you can do with an over-collateralized loan backed by an ephemeral asset (as opposed to a house or car). Maybe some rich crypto whales could use these loans for a more tax-efficient use of their money without losing their crypto position, but even that is still a form of leverage — you lose more when it goes down compared to just selling the portion you need to pay for expenses.

And of course, you can do all these things with CeFi, it’s just that you may need to pass through pesky KYC to do so. So in that sense, DeFi will always have an advantage — it’s a more immediate and uncensorable user experience, provided you’ve set up your wallet.

There are also issues related to fundamental design. AMMs like Uniswap or Curve will never really replace order book exchanges because they can’t price things “correctly” on their own. Of course, the order book exchange doesn’t have to be centralized, but we’re still a bit far off from mass adoption of platforms like Serum or Loopring.

I talked about this in-depth in my feature on DEXs, and I share the overall judgement expressed by Loopring’s Matthew Finestone: centralized exchanges will definitely remain for those who want full regulation, for example institutions, plus as gateways for fiat.

Such a scenario leaves a sizable piece of the pie for centralized venues.

Uniswap governance epic fail

The Dharma-led governance vote to reduce the voting quorum on Uniswap failed… because it didn’t reach quorum.

The weirdest thing about this story is that any reasonable person would look at it and say, “but it did reach quorum!”

The final tally is 39,596,759 UNI for vs. 696,857 UNI against, which does add up to slightly more than the 40 million required. Except that Uniswap (and Compound) for some reason considers “quorum” as “how many people voted yes.” The generally accepted definition takes all votes into consideration, no matter which way they were cast.

So why did this failure occur? Is it a coincidence that the vote would have passed under the standard definition of a quorum?

I have strong doubts about that. Even some in the community suggest that people really thought it would have passed. The logic is that once you reach the threshold there’s no point to add more votes since it costs gas and work to rally voters.

Maybe the vote really whiffed by a hair because it couldn’t gather the community support it needed.

But I wouldn’t be surprised to learn that someone at Dharma just messed this up.